They want to freeze minimum wages and pensions for years, while the dollar and prices will rise: the main thing from the Budget Declaration

The Cabinet of Ministers plans to freeze minimum wages and pensions. Government interlocutors say that there are no plans to revise social standards, at least in the 2025 budget. At the same time, the Budget Declaration states: the cost of living (and the minimum pension depends on it) and the minimum wage will be frozen until 2027.

At the same time, a significant devaluation of the hryvnia is expected next year. The dollar may rise in price by more than 10% and reach 45 UAH/$. The general price level (inflation index) will approach 10% per year over the next two years. Only in 2027 will inflation slow down to 8%.

What will happen to salaries and pensions?

The budget declaration surprised even some members of the government team. This is a document that is adopted by the Cabinet of Ministers every few years and which forecasts the main macro indicators and demonstrates the government’s estimates of state revenues and expenditures. The most sensitive news: the government proposes to freeze the minimum wage and the cost of living until 2027. For now, this is just an official statement of intent. But if the situation does not change, Ukrainians are likely to face difficult years.

“It will be a disaster,” says Lyudmila Cherenko, Doctor of Economic Sciences, head of the department for research on living standards of the population at the Institute of Demography and Social Research, about the consequences of such a decision. The fact is that the level of the minimum pension also depends on the cost of living.

Over the two years of the great war, the overall poverty level in Ukraine increased by 1.5-1.7 times. But “deep poverty” over the same period increased more than 5 times. Deep poverty is a situation where income is not enough to meet physiological needs, that is, a person is forced to malnourish. This category also includes those pensioners who live on the minimum payment.

“It’s clear that there is a war going on, but people’s incomes are not something that needs to be critically saved on. The economy also depends on people’s incomes... In just two years of the great war, the scale of poverty increased by 1.5-1.7 times. But when we take deep poverty, this is the proportion of people who survive, their number has increased more than 5 times,” says Cherenko.

The journalist spoke with two government representatives. Both confirmed: in the draft budget for at least 2025 there will be no increase in the minimum wage and the cost of living. “We are increasing the minimum pension for age groups by a separate government decision. Therefore, for the majority, the minimum pension will still increase, but in relation to the general level of the minimum pension and minimum wage, unfortunately, they will be frozen,” the government explained.

Let us note: indeed, in Ukraine there are several minimum pensions. For example, pensioners aged 70 to 80 years, who have an insurance period of 35 years for men and 30 years for women, receive a pension of at least 3,240 UAH. But these “minimum pensions” are received only by those who have fulfilled the length of service and reached a certain age. The remaining pensioners must receive no less than the minimum pension, the level of which depends on the cost of living for those who have lost their ability to work. Now it is 2361 UAH, and this figure will not change.

How will the incomes of Ukrainians change?

Andrey Reva, former Minister of Social Policy, tells OBOZ.UA: social standards were already frozen in 2015, and then it was extremely difficult to overcome the drop in income. Reva, commenting on this government decision, said: “Even Getmantsev expressed doubts that this should be done. Our standards were frozen for one year in 2015. This led to a drop in living standards, and in 2016 it was very difficult to correct this failure. You can freeze social standards, but you will not freeze inflation. People need to live."

Indeed, the head of the committee on finance, tax and customs policy, Daniil Getmantsev, said in his Telegram channel that the parliament will give its proposals. It should be noted that the government develops and submits the draft budget to the Rada, but only parliamentarians can accept it. They also have the right to make changes to the draft Cabinet of Ministers.

“I understand the logic of the Ministry of Finance, but I consider such a step to be an overly harsh measure of fiscal consolidation, especially in the context of the predicted acceleration of inflation. In such conditions, at least the task of returning migrants from abroad does not seem entirely realistic. This issue will definitely be discussed in parliament, we will give our assessments and proposals,” Getmantsev noted.

Over four years, the cumulative inflation rate (from 2024 to 2027) will reach 35.8%. If the minimum wage and pension do not change during this period, the incomes of the poorest Ukrainians will fall by a third.

At the same time, as Reva says, increasing the minimum wage allows increasing budget revenues. Employers are raising the minimum wage, while revenues from personal income tax and the unified social contribution are growing.

“A change in the minimum wage not only increases budget revenues, but also increases the costs of state enterprises, where many salaries are tied to the minimum level. The minimum wage did not move anywhere during the first two years of the full-scale invasion. Only now it has risen in two stages,” adds Paraschiy.

What will happen to the dollar exchange rate?

The hryvnia will devalue significantly starting in 2025. If the exchange rate included in the budget for this year is 40.7 UAH/$, then next year the government has provided for the devaluation of the hryvnia to 45 UAH/$. Devaluation is expected at 10.5%. Whereas from 2025 to 2026 the hryvnia will lose only 3.3% against the dollar.

A devaluation of as much as 10% is a rather pessimistic estimate. In a comment to OBOZ.UA, the head of the analytics department at Concorde Capital, Alexander Parashchiy, noted that, in his opinion, this is an unlikely scenario. The Ministry of Finance always strives to provide the most pessimistic estimates for the exchange rate, because this leads to an increase in revenues. However, most often these forecasts are not realized.

“You need to understand that for the Ministry of Finance the tendency to overestimate the expected dollar exchange rate is normal. Because the higher the dollar exchange rate, the more taxes they collect,” says Paraschiy. He also notes that the IMF also voiced rather pessimistic estimates of the dollar exchange rate. They expect that next year the value of the hryvnia against the dollar will reach 45.8 UAH/$.

It should be noted that the declaration was developed taking into account that all tax rates will not change, except for excise taxes on fuel and tobacco. This is because the tax increase bill has not yet been adopted by the government. Moreover, as OBOZ.UA sources say, already this month a bill should be approved, the purpose of which is to increase VAT and personal income tax. This will significantly change the situation with budget revenues.

The government cannot develop clear forecasts due to uncertainty regarding the duration and intensity of military operations. There is a threat of a blockade of road transit (primarily by Polish activists) of Ukrainian agricultural goods, a blockade of Ukrainian seaports, etc. The budget declaration is developed taking into account the recommendations of creditors, primarily the IMF.

“Budget policy will be aimed at reducing the level of the state budget deficit in 2025-2027, which was increased in order to meet the needs for financial resources of the state after the start of the full-scale armed aggression of the Russian Federation against Ukraine,” the government’s presentation says. Even after the end of a full-scale war, Ukrainians will face at least several difficult years. To stabilize the budget and reduce the debt burden, sacrifices will have to be made. However, it is important first of all to protect the most vulnerable categories of the population: pensioners and those who work for the minimum wage. Savings at their expense could lead to the number of Ukrainians with the status of “deep poverty” reaching a critical level.